In an interview to CNBC-TV18, Sandeep Sikka, CFO of HSIL spoke about the results and his outlook for the company.
Below is the verbatim transcript of Sandeep Sikka’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy.
Latha: What is the second half looking like? There are a couple of things going for companies like yours with the Seventh Pay Commission and possibly better rural spending? Will the second half be a much bigger improvement over the first half?
A: Generally, if you see the historical trends on which the company is operating, the second half sales almost in the ratio of 55 to 45; 45 being the first half and 55-57 percent during the second half. If we talk about the performance which has happened in the last quarter, I think the numbers which we have demonstrated on the building product side as well as on the packaging product side is a best amongst the industry both on the buildings product side as well as on the packaging product side.
However, the overall gross sales numbers has grown around 18.5 percent, profit after tax (PAT) around growth of 8 percent. We have to adjust certain numbers which are relating to transitions from Indian generally accepted accounting principles (GAAP) to Indian Accounting Standards (Ind AS). If we adjust those numbers, the growth on PAT is 26 percent. These adjustments are more relating to notional M2M gains on the derivative contracts wherein company earned some notional income in the last quarter or the last financial year.
Sonia: Your margins though in both building products and packaging products have fallen marginally compared to what we saw same time last year. Why is that and what is the outlook on margins for the second half?
A: The main reason why the margin looks subdued on a face to face comparison is a same as I told you about - there was the Ind AS transitions in the last year. If you see the notes to the results, last year we had a notional one single item mark to market gain on the derivative contracts in the last financial year at Rs 5.06 crore and which in this financial year is Rs 0.54 crore.
This income actually till last year was getting a part of the gross block and now it has fallen into other income. As a result of which the last year's profits looks higher and when you see apple to apple comparison that was the point when I was referring that PAT on apple to apple comparison without Ind AS transition is at 26 percent growth on PAT.Anuj: Your finance costs have come down a bit. Do you think going forward that could lead to bit more uptake in your profit numbers?
A: Yes, definitely in last one year we have been able to refinance all our debt. However, most of our external commercial borrowing (ECB) which were at London Inter-Bank Offered Rate (LIBOR) plus 300 bps, in the last 12 months we have been able to refinance that at now LIBOR plus 120-130 bps. So that is one area where in the interest cost reduction happened. Second, the overall debt of the company in last one year has come down by around Rs 225-250 crore repayment and that has also resulted in lowering of the interest cost.
Sonia: Can you tell us about the new business that you launched of kitchen and consumer appliances? How has it done in this quarter and does that continue to incur losses because the last time you told us that you were investing a lot in brand building and the sales channel, so the losses have been accumulating there?
A: You are right. This business we call as a consumer business and right now the results of building products includes the consumer business results. This quarter's sale is Rs 28 crore for this business and it is almost 2.50 times higher as compared to last year corresponding figure of around Rs 11.5-12 crore.
In this business, we will still invest as we have already disclosed to the market that over next 12-18 months there will be EBITDA level investment into this business and for the quarter the EBIT level expense which is already a part of the EBIT margin is around Rs 5.50 crore as compared to previous year figure of around Rs 2.50 crore. So this is also one of the reasons why EBIT margins on the face of building product business looks subdued.
Latha: With the coming of the Modi government, HSIL was expected to do big things. In the entire Swachhata campaign the movement of toilets in rural areas much more than a Jaquar or Cera Sanitaryware, it was HSIL which was seen to be the beneficiary. Are you seeing any quantum leap in demand?
A: When we talk about Swachh Bharat - that is definitely a very good move and very good initiative of Government of India because the overall sanitation level in India is still 40 percent. HSIL is only company in India who has segmented brands across the value chains. So, like we move from the bottom of the pyramid brand like we have brands like Benelave and then we keep up scaling Hindware, Hindware Art, Hindware Italian and we have a super luxury brand also called Queo.
However, what is happening is, in Swachh Bharat the sanitary ware which is going is more of a utility function right now rather than a branded function. Most of it is coming from the low and the small scale sectors, unbranded players where in it gets difficult for a branded company to compete because we have to work on the full paraphernalia of compliances and everything. It gets difficult to map our cost according to them.
Hence, the good part is in a medium to long-term range, when people start using these utilities, when they shift their bathrooms inside their house they get excited about using the brands and that is where the medium to long-term prospects of the company would get very strong.
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